Mr. Per Bank reports

LOBLAW REPORTS 2024 SECOND QUARTER RESULTS

Loblaw Companies Ltd. has released its unaudited financial results for the second quarter ended June 15, 2024.

Loblaw's results in the second quarter of 2024 reflected strong operational performance and the impact of the settlement of the bread price-fixing class actions commenced in 2017, which negatively impacted net earnings by $121-million. For details regarding the settlement, please see the company's news release.

In the quarter, Canadian consumers remained focused on value and responded favourably to Loblaw's market-leading banners, private-label brands and personalized PC Optimum offers. Loblaw maintained its focus on retail excellence across its businesses, driving sales growth and maintaining a careful focus on cost control. Drug retail sales continued to outperform food retail. Drug front store sales reflected continued strength in the beauty category but were pressured by the company's exit from certain low-margin electronics categories. Pharmacy sales growth rates returned to more normal levels, reflecting continuing momentum in new health care services. Food retail sales reflected increased customer visits in the quarter, despite lapping very strong sales growth last year. Food sales growth was led by the continuing strength of the company's Maxi and NoFrills hard-discount stores. A sharp focus on value was reflected in another sequential reduction in the company's internal inflation rate. Food inflation rates have been declining and remain below Canada's total household inflation rate, as Canada's consumer price index (CPI) for food purchased from stores declined for the sixth consecutive quarter.

"Our commitment to provide value, quality and service has been recognized by our customers, as traffic was up across our network of stores," said Per Bank, president and chief executive officer, Loblaw Companies. "We are grateful for the ongoing trust of our customers as their preferred retailer for everyday needs."

2024 second quarter highlights:

• Revenue was $13,947-million, an increase of $209-million or 1.5 per cent.
• Retail segment sales were $13,658-million, an increase of $187-million or 1.4 per cent:
  • Food retail (Loblaw) same-stores sales increased by 0.2 per cent, compared with 6.1 per cent last year.
  • Drug retail (Shoppers Drug Mart Corp.) same-store sales increased by 1.5 per cent, compared with 5.7 per cent last year, with pharmacy and health care service same-store sales growth of 5.4 per cent, partially offset by a decline in front store same-store sales of 2.4 per cent.
• E-commerce sales increased by 14.2 per cent.
• Operating income was $868-million, a decrease of $59-million or 6.4 per cent.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $1,713-million, an increase of $73-million or 4.5 per cent.
• Retail segment gross profit percentage was 32.0 per cent, an increase of 90 basis points, primarily driven by improvements in shrink and drug retail gross margins, mainly due to sales mix.
• Net earnings available to common shareholders of the company were $457-million, a decrease of $51-million or 10.0 per cent. The decrease was primarily driven by charges related to the settlement of class action lawsuits.
• Diluted net earnings per common share were $1.48, a decrease of 10 cents or 6.3 per cent.
• Adjusted net earnings available to common shareholders of the company were $664-million, an increase of $38-million or 6.1 per cent.
• Adjusted diluted net earnings per common share were $2.15, an increase of 21 cents or 10.8 per cent.
• Net capital investments were $475-million, reflecting gross capital investments of $495-million, net of proceeds from property disposals of $20-million.
• The company repurchased for cancellation 3.2 million common shares at a cost of $482-million. The free cash flow from the retail segment was $475-million.

Consolidated and segment results of operations

An attached table provides key performance metrics for the company by segment.

An attached table provides a breakdown of the company's total and same-store sales for the retail segment.

Retail segment:

• Retail segment sales in the second quarter of 2024 were $13,658-million, an increase of $187-million or 1.4 per cent:
  • Food retail (Loblaw) sales were $9,653-million and same-store sales grew by 0.2 per cent (2023 -- 6.1 per cent):
    • The CPI for food purchased from stores was 1.7 per cent (2023 -- 9.1 per cent), which was in line with the company's internal food inflation.
    • Food retail traffic increased and basket size decreased.
  • Drug retail (Shoppers Drug Mart) sales were $4,005-million and same-store sales grew by 1.5 per cent (2023 -- 5.7 per cent), with pharmacy and health care service same-store sales growth of 5.4 per cent (2023 -- 6.3 per cent), partially offset by a decline in front store same-store sales of 2.4 per cent (2023 -- growth of 5.0 per cent):
    • On a same-store basis, the number of prescriptions increased by 2.1 per cent (2023 -- 0.9 per cent) and the average prescription value increased by 1.9 per cent (2023 -- 4.7 per cent).
    • The decline in front store same-store sales was primarily driven by lower sales of food and household items, and the decision to exit certain low-margin electronics categories, partially offset by the continued strength in beauty products.
• Operating income in the second quarter of 2024 was $815-million, a decrease of $110-million or 11.9 per cent. The decrease was primarily driven by charges related to the settlement of class action lawsuits.
• Gross profit in the second quarter of 2024 was $4.37-billion, an increase of $178-million or 4.2 per cent. The gross profit percentage of 32.0 per cent increased by 90 basis points, primarily driven by improvements in shrink and an increase in drug retail gross margins, mainly due to sales mix.
• Adjusted EBITDA in the second quarter of 2024 was $1,649-million, an increase of $62-million or 3.9 per cent. The increase was driven by an increase in gross profit, partially offset by an increase in selling, general and administrative (SG&A) expenses. SG&A expenses as a percentage of sales were 19.9 per cent, an increase of 60 basis points, primarily due to lower operating leverage, the year-over-year impact of labour costs and certain real estate activities, and costs related to network optimization.
• Depreciation and amortization in the second quarter of 2024 were $668-million, an increase of $11-million or 1.7 per cent, primarily driven by an increase in depreciation of leased assets and information technology (IT) assets, and an increase in depreciation of fixed assets related to conversions of retail locations, partially offset by the impact of prior-year accelerated depreciation due to the reassessment of the estimated useful life of certain IT assets. Included in depreciation and amortization was the amortization of intangible assets related to the acquisitions of Shoppers Drug Mart and Lifemark Health Group of $115-million (2023 -- $116-million).
• On July 24, 2024, the company and George Weston Ltd. (Weston) entered into binding minutes of settlement to resolve nationwide class action lawsuits against them relating to their role in an industry-wide price-fixing arrangement involving certain packaged bread products, which occurred between 2001 and 2015. The binding minutes of settlement provide for a total settlement of $500-million. Weston will pay $247-million and the company will pay $253-million, offset by $96-million previously paid to customers by the company under the Loblaw card program. The $500-million settlement amount was negotiated with lawyers representing consumers in a mediation presided over by the Chief Justice of the Ontario Superior Court of Justice. The settlement is subject to finalizing a binding settlement agreement between the company and Weston, and the lawyers representing consumers, and court approval. If the settlement is approved, it will resolve all of the consumers' claims against the company and Weston relating to this matter. In the second quarter of 2024, charges of $164-million ($121-million, net of income taxes) were recorded in SG&A, relating to the company's portion of the total settlement and related costs.

Financial services segment:

• Revenue in the second quarter of 2024 was $367-million, an increase of $19-million or 5.5 per cent. The increase was primarily driven by higher interest income from growth in credit card receivables and higher sales attributable to The Mobile Shop.
• Earnings before income taxes in the second quarter of 2024 were $16-million, as compared with losses of $34-million in the prior period. The improvement was mainly driven by lapping of a prior-year charge of $37-million related to a commodity tax matter, higher revenue, as described above, and the year-over-year favourable impact of the expected credit loss provision. This improvement was partially offset by higher contractual charge-offs and financing costs due to the current macroeconomic environment.

Outlook

Loblaw will continue to execute on retail excellence while advancing its growth initiatives with the goal of delivering consistent operational and financial results in 2024. The company's businesses remain well positioned to meet the everyday needs of Canadians.

For the full year 2024, the company continues to expect:

• Its retail business to grow earnings faster than sales;
• Adjusted net earnings per common share growth in the high single digits;
• To continue investing in its store network and distribution centres by investing a net amount of $1.8-billion in capital expenditures, reflecting gross capital investments of approximately $2.2-billion, net of approximately $400-million of proceeds from property disposals;
• To return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.

Environmental, social and governance (ESG)

In the second quarter of 2024, the company progressed its ESG pillars:

• Fighting climate change: Loblaw achieved a significant milestone on the path toward net zero by receiving the Science Based Targets initiative (SBTi) approval for the company's near-term science-based emissions reduction targets. This approval relates to two of the company's carbon-related targets:
  • To reduce absolute Scope 1 and Scope 2 greenhouse gas (GHG) emissions 50 per cent by 2030 relative to a 2020 baseline;
  • To ensure that 70 per cent of the company's suppliers by spend covering purchased goods and services will have science-based targets by 2027.
• Loblaw's continued support of WWF-Canada's native plant program enabled gardeners in Southern Ontario and Quebec to purchase a range of native plants from select garden centres this spring. These plants, adapted to local conditions, foster healthy landscapes, attract pollinators and restore wildlife habitats. With availability at 130 garden centres across the region, Canadians can easily contribute to biodiversity conservation from their own backyard, balcony and beyond.
• Advancing social equity: This year, the 2024 Shoppers Drug Mart Run for Women drew participants and fundraisers across 18 communities. With an impressive total of 27,000 participants, this event successfully raised $3.3-million to support local women's mental health programs throughout Canada. In recognition of National Indigenous History Month, the company marked the opening of its Downie-Wenjack Legacy Space. A Loblaw community grant recipient, the Canadian Centre for Indigenous Business (CCIB), celebrated the launch of the youth indigenous business grant. In celebration of Pride Month, Loblaw banner divisions participated in the Pride March across the country.

Normal course issuer bid program (NCIB)

On a year-to-date basis, the company repurchased 6.4 million common shares for cancellation at a cost of $952-million.

From time to time, the company participates in an automatic share purchase plan (ASPP) with a broker in order to facilitate the repurchase of the company's common shares under its NCIB. During the effective period of the ASPP, the company's broker may purchase common shares at times when the company would not be active in the market.

Declaration of dividends

Subsequent to the end of the second quarter of 2024, the board of directors declared a quarterly dividend on common shares and second preferred shares, Series B.

Common shares:  51.3 cents per common share, payable on Oct. 1, 2024, to shareholders of record on Sept. 15, 2024

Second preferred shares, Series B:  33.125 cents per share, payable on Sept. 30, 2024, to shareholders of record on Sept. 15, 2024

Conference call and webcast

Loblaw will host a conference call, as well as an audio webcast, on July 25, 2024, at 10 a.m. ET.

To access via teleconference, please dial 416-764-8688 or 888-390-0546. The playback will be made available approximately two hours after the event at 416-764-8677 or 888-390-0541, access code 397174 followed by the pound key. To access via audio webcast, please go to the investor section of the company's website. Preregistration will be available.

Full details about the conference call and webcast are available on the Loblaw website.

We seek Safe Harbor.